How would you like these apples? Your stock is down 50% from its high after a few quarters of questionable results -- mostly stemming from management problems -- and it trades around $12.50 per share. The chairman and CEO of the company gives up the CEO spot to his senior operating guy and puts 1 million shares in a trust. You wake up one day to see the company has bought back 500,000 shares of the chairman's stock at $15 per share -- nearly a 20% premium to the current market value -- necessitating a $1.2 million earnings charge to reflect the premium.
Would you scream at the top of your lungs, auto-sell out of principle and wish you had a lawyer on staff? Scream at the top of your lungs, get the party line from the company and then auto-sell out of principle? Or ignore this apparent slap in the shareholders' faces, because the stock already reflects the company's problems and there's a catalyst for 50% appreciation in the next 12 months?
CCC Information Services
is a stock we bought in the low teens about 18 months ago. The company has a solid, core business that manages automobile insurance processing via an innovative software platform. It generates consistent monthly revenue with double-digit margins, fat returns on capital and healthy free cash flow. Management -- whom we had met and checked out -- had built a 40% market share right under the nose of some formidable competition like
Automatic Data Processing
. And a partnership spun out of Jack Byrne's
owned more than 30% of the stock, so there appeared to be a good pedigree. We came up with a fair market value of $18 per share, with a low double-digit growth assumption.
The company also had a number of sexy, long-term initiatives that increased its attractiveness. First, CCC craftily positioned itself to be the technological middle man between the insurance companies, the collision repair industry and consumers to facilitate some sort of rationalization of the pathetically sloppy $75 billion business of settling insurance claims for auto accidents. Second, CCC's software platform enabled the creation of virtual insurance companies, wherein non-auto insurer
, armed with CCC as its back office, could go to
and sign a deal to market auto insurance to MBNA's credit card customers. And last but not least, CCC owns a net 15% of
, the driver behind
and others' insurance offerings on the Internet and a candidate for an IPO.
But, as is occasionally the case, things haven't gone so well for CCC on several fronts. Insurance companies are torn between outsourcing their claims capability for cost reasons and keeping it in-house for service reasons -- the latter has been slowing CCC's growth. In addition, some software and service snafus have affected both the collision repair shops and the insurers. And the original collision repair estimate business has matured and is beginning to face some pricing pressure. Finally, after CCC built up infrastructure for the TIG outsourcing deal, TIG blew its relationship with MBNA in a very public shouting match, leaving CCC with lots of expenses and little revenue in the claims outsourcing area. We were up a quick 50% on CCC from cost but have given it all back ... and then some.
All these are run-of-the-mill competitive and value-analysis issues that are an investment management firm's bread and butter. What usually perturbs -- and in this case infuriates -- us is management. We and a number of analysts have reported problems with CCC, such as trouble getting management to return phone calls in a timely manner over the past year, and have expressed a sense of management disdain for shareholders.
What's more, the company has said one thing at the investors' conference and then another thing two weeks later in its earnings report -- which can innocently happen from time to time but clearly raises eyebrows.
Although a number of the company's problems are industry issues -- for example, the automobile insurance industry is under fierce pricing pressure, which makes life uncomfortable for CCC -- a number of the problems are simply results of poor management and taking on too much at one time.
Which brings us back to the issue that's raising the volume of unhappiness to unbearable levels: the above-market repurchase of stock from CCC chairman and founder David Phillips. The official word from CCC is that it's already repurchasing stock at current levels, and because the company felt the stock was worth well in excess of $15 per share, it's an intelligent thing to do.
It's tough to think of a worse act of corporate governance in recent memory, although I still say
Chock Full O'Nuts
topper. How can you send a worse message to shareholders, few of whom have a profit? Since when do large, noncontrol blocks of stock trade at a premium?
Regardless of whether the $1.2 million payoff to Phillips was in lieu of some sort of contracted compensation scheme -- clearly nothing based on performance -- this is the worst possible way to deliver it. Where the heck is the board on this? We suspect that at least part of the board is rubber-stamping, but where are the famed
people, who purchased 30.5% of the stock from the
White River Group
, the original backers of Phillips and CCC?
There are two schools of thought in this scenario.
The first is sell and go away. There's worse than little confidence in management's ability to deliver value -- and you can live a long and happy life by disassociating yourself with management teams that have a propensity to underdeliver and don't think like public shareholders. There are plenty of other solid businesses at reasonable prices to be had. (To be fair, new-man-at-the-helm Gitesh Ramamurthy -- not an outsider -- has barely had a chance to execute, so there's potential for change.)
On the other hand, we could be blowing it out at the bottom. For every stock we've sold near lows because we felt that management didn't get it and then the stock sat there for four years, there's been another for which we deftly made the bottom. Remember "reversion to the mean," which I have plugged unmercifully as a bedrock investment philosophy in every other column? We can still make a reasonable case that CCC is worth $18 if it can execute its new ventures. And InsureQuote is deemed to be worth $6 share, which can be derived via current Internet math. I doubt a buyout is anywhere close, considering that the chairman chose to sell at $15.
P.S. We sold.
Jeffrey Bronchick is chief investment officer at Reed Conner & Birdwell, a Los Angeles-based money management firm with about $1 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value Fund. At time of publication, RCB was long Automatic Data Processing, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at
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